SATO Corporation, Interim Report 25 October 2024 at 9:00 am

Summary for 1 January to 30 September 2024 (1 January to 30 September 2023)

The economic occupancy rate was 95.4% (94.9).Net sales totalled EUR 227.0 million (214.9).Net rental income was EUR 160.5 million (148.5).Profit before taxes was EUR 83.5 million (-94.2).The unrealised change in the fair value of investment properties included in the result was EUR 10.8 million (-140.0).Housing investments amounted to EUR 31.7 million (122.5).Invested capital at the end of the review period was EUR 4,694.3 million (4,552.2).Return on invested capital was 4.1% (-1.2).Equity was EUR 2,583.7 million (2,406.2), or EUR 30.44 per share (42.50).Earnings per share were EUR 0.84 (-1.42).A total of 160 rental apartments were completed (809). Renovation of 56 rental homes (388) was completed.A total of 189 rental apartments are under construction (518).Occupancy rate and net rental income continued to grow.We issued EUR 250 million in unsecured notes as a private placement in August.

Summary for 1 July to 30 September 2024 (1 July to 30 September 2023)

The economic occupancy rate was 95.9% (94.7).Net sales totalled EUR 76.5 million (72.5).Net rental income was EUR 59.3 million (55.1).Profit before taxes was EUR 32.5 million (7.0).The unrealised change in the fair value of investment properties included in the result was EUR 4.0 million (-18.0).Housing investments amounted to EUR 8.9 million (29.8).Earnings per share were EUR 0.31 (0.10).A total of 68 rental apartments were completed (161). Renovation of 0 rental homes (191) was completed.

President and CEO Antti Aarnio:

- The number of newbuild homes completed in growth centres has taken a downturn during the current year. The number of previously completed newbuild homes still in the market is, however, higher than expected, and competition for good tenants has remained intense.

- Regardless of the continuing oversupply of rental apartments, we have managed to improve our economic occupancy rate.

- Measures to increase operational efficiency and generate savings have improved our net rental income, which has also been affected positively by the successful moderate rent reviews and higher occupancy rate.

- In Finnoo, Espoo, the first rental homes at Peijinkuja 6 were completed in September, and the rest at the beginning of October. The neighbouring building, Peijinkuja 10, will be completed in December this year and is, for the time being, our last newbuild property under construction.

- In August, we issued EUR 250 million in unsecured notes as a private placement. Thanks to the successful issue, our financing needs for 2025 are now mostly covered.

- I am thankful for SATO staff members' diverse professional competence, broad expertise and willingness to develop both their own work and our services. The results are reflected directly in the everyday lives of our customers.

Operating environment

During the period under review, the economic uncertainty and the continued abundant supply of rental housing in growth centres still remained key factors affecting SATO's operating environment.

The Finnish economy is entering a phase of slow growth. Pay rises, slower inflation and gradual interest rate decline are improving the purchasing power of consumers. Consumer confidence has still remained at a low level.

According to the Bank of Finland's September 2024 interim forecast, Finland's GDP is projected to contract further in 2024 but to grow by 1.1% in 2025 and 1.8% in 2026. Employment is also projected to improve as economic growth accelerates.

Inflation in Finland has been the lowest in the euro area, and the Bank of Finland forecasts it to be around 1.1% in 2024 and rise nearer to 2% in the immediate years ahead. In the euro area, inflation pressure eased further and the inflation rate was 1.8% in September. As expected, the European Central Bank continued its rate cuts in October, announcing a third rate cut of 0.25 percentage points. Markets are anticipating further rate cuts this year and next.

Construction of newbuild homes is at a historically low level. Largely due to an increase in the volume of interest-subsidised housing construction, there has, however, been a slight upturn in projects started. The number of apartments completed has contracted clearly this year, but the newbuild construction volume of previous years, which exceeds the long-term housing demand, is, however, maintaining an oversupply of rental homes in the growth centres. In Helsinki, the number of vacant rental homes is decreasing slightly, but the shrinking of the oversupply has been slower than anticipated earlier and competition for good tenants continues.

Dense urban housing is still becoming increasingly popular, and there is demand for rental homes in growth centres close to good public transport connections and services. Among the major growth centres, the Helsinki Metropolitan Area (HMA), Tampere and Turku continue to enjoy strong growth, while Statistics Finland forecasts a downturn in the nationwide population trend in 2031. The HMA is projected to grow by more than 200,000 new residents by 2040. Almost 80% of HMA residents already live in households with one to two members, and the number of small households continues to grow. The proportion of immigrants is projected to increase in the HMA from the current 17% to 25% by 2030. The ageing population is moving to growth centres providing access to services and expects more and more housing-related services.

The demographic change coupled with the price development create a stable foundation for rental housing demand, especially in the HMA, Tampere and Turku. Migration to large growth centres has continued, and the HMA's migration gain in 2023 was the highest in the 2000s: 23,500 persons. In early 2024, the trend levelled off and the migration gain of the HMA was 10,300 persons. The strong migration trend is reflected in the demand for rental homes in growth centres.

Urbanisation, the income development of wage and salary earners, pent-up housing demand of households and lower interest rates together with the decrease in new housing production will increase housing demand going forward. The housing allowance policy changes may, however, steer consumers towards looking for more affordable housing. Some of those looking for a home to buy may be considering a rental home as a housing option.

Rental housing providers are still competing for good tenants, which results in rent reviews remaining moderate. Going forward, higher maintenance and finance costs will be reflected in higher rent costs, while at the same time the supply of rental housing decreases.

REVIEW PERIOD 1 JANUARY TO 30 SEPTEMBER 2024 (1 JANUARY TO 30 SEPTEMBER 2023)

Net sales and profit

In January-September 2024, SATO Corporation's consolidated net sales totalled EUR 227.0 million (214.9).

Operating profit was EUR 141.5 million (-42.8). Operating profit without the change in the fair value of investment properties was EUR 130.7 million (97.2). The unrealised change in fair value through profit or loss was EUR 10.8 million (-140.0).

Net financing expenses totalled EUR -58.1 million (-51.4).

Profit before taxes was EUR 83.5 million (-94.2). Cash flow from operations (free cash flow after taxes excluding changes in fair value) in January-September amounted to EUR 60.2 million (15.0).

Earnings per share were EUR 0.84 (-1.42).

Financial position and financing

The consolidated balance sheet total at the end of September was EUR 5,211.8 million (5,108.6). Equity totalled EUR 2,583.7 million (2,406.2). Equity per share was EUR 30.44 (42.50).

The Group's equity ratio at the end of September was 49.6% (47.1). EUR 625.0 million in new long-term financing was drawn and the solvency ratio at the end of September was 38.5% (41.9).

The Group's annualised return on equity was 3.6% (-4.4). Return on invested capital was 4.1% (-1.2).

Interest-bearing liabilities at the end of September totalled EUR 2,110.6 million (2,145.9), of which loans on market terms amounted to EUR 2,005.6 million (2,016.6). The average loan interest rate was 4.0% (3.4). Net financing expenses totalled EUR -58.1 million (-51.4).

The calculated impact of changes in the market value of interest hedging on equity was EUR -5.1 million (-2.8).

The proportion of loans without asset-based securities was 69.2% (88.1) of all loans. At the end of September, unencumbered assets accounted for 71.5% (89.9) of total assets.

Housing business

Our housing business includes rental activities, customer service, lifecycle management and maintenance. Effective rental activities and digital services provide home-seekers with quick access to a home, and the Group with a steadily increasing cash flow. High-quality maintenance operations ensure the comfort of residents and that the apartments stay in good condition and maintain their value. We serve our customers in daily housing issues through our customer-oriented service organisation.

Rental income was EUR 227.0 million (214.9). On average, the economic occupancy rate of apartments was 95.4% (94.9) and the external tenant turnover 28.7% (26.8).

At the end of the reporting period, the average monthly rent of SATO rental homes was EUR 18.38 per m2 (18.08).

Net rental income from apartments totalled EUR 160.5 million (148.5).

Investment properties

At 30 September 2024, SATO owned a total of 25,714 homes (25,301). The reporting period saw the completion of 160 (809) rental homes. The number of divested rental apartments was 1 (528).

Fair value

The development of the value of rental apartments is a key factor for SATO. Its housing stock is concentrated in areas and apartment sizes which are expected to be the focus, in the long term, of increasing rental apartment demand. The allocation of building repairs is based on life-cycle plans and repair need specifications.

At the end of September, the fair value of investment properties came to a total of EUR 4,953.3 million (4,970.9). The change in the value of investment properties, including investments and divestments during the reporting period, was EUR 67.7 million (-73.3).

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 245 million higher when valuated with the income value method.

At the end of September, the commuting zone of the Helsinki Metropolitan Area accounted for around 86.5% and Tampere and Turku together made up around 13.5% of the value of apartments.

Investments, divestments and property development

Investment activities are used to manage the housing portfolio and prepare the ground for growth. Since 2000, SATO has invested more than EUR 3 billion in non-subsidised rental apartments. SATO acquires and builds entire rental buildings and single rental apartments. Property development allows for new investments in rental apartments in Finland. The rental potential and value of rental apartments owned by SATO are developed through renovation activities.

Investments in apartments totalled EUR 31.7 million (122.5). The Helsinki Metropolitan Area represented 90.9% of all investments during the period under review. New apartments accounted for 44.0% of the total. At 30 September 2024, there were binding purchase agreements to a total of EUR 4.2 million (33.5).

During the period under review, 1 rental homes were divested in Finland (6). Their total value was EUR 0.3 million (1.0).

The book value of the plot reserve owned at the end of September totalled EUR 67.2 million (48.1). The value of new plots acquired by the end of September totalled EUR 26.5 million (0.0).

Permitted building volume for around 1,550 homes is being developed for plots in the company's housing portfolio. This allows SATO to utilise existing infrastructure, create a denser urban structure and thus bring more customers closer to services and public transport connections.

A total of 160 rental homes (809) were completed for SATO. A total of 189 rental homes (518) were under construction at 30 September 2024.

A total of EUR 13.7 million (21.2) was spent on repairing apartments and improving their quality.

Personnel

At the end of September, the Group had 304 employees (331), of which 277 (301) had a permanent employment contract. The average number of personnel in January-September was 320 (336).

REVIEW PERIOD 1 JULY TO 30 SEPTEMBER 2024 (1 JULY TO 30 SEPTEMBER 2023)

Net sales and profit

In July-September 2024, SATO Corporation's consolidated net sales totalled EUR 76.5 million (72.5).

Operating profit was EUR 54.5 million (25.8). Operating profit without the change in the fair value of investment properties was EUR 50.5 million (43.8). The unrealised change in fair value through profit or loss was EUR 4.0 million (-18.0).

Net financing expenses totalled EUR -22.0 million (-18.8).

Profit before taxes was EUR 32.5 million (7.0). Cash flow from operations (free cash flow after taxes excluding changes in fair value) in July-September amounted to EUR 25.9 million (24.6).

Earnings per share were EUR 0.31 (0.10).

Housing business

Rental income was EUR 76.5 million (72.5). On average, the economic occupancy rate of apartments was 95.9% (94.7) and the external tenant turnover 29.3% (28.0).

At the end of the reporting period, the average monthly rent of SATO rental homes was EUR 18.38 per m2 (18.08).

Net rental income from apartments totalled EUR 59.3 million (55.1).

Investment properties

At 30 September 2024, SATO owned a total of 25,714 homes (25,301). The reporting period saw the completion of 68 (161) rental homes. The number of divested rental apartments was 0 (3).

Fair value

At the end of September, the fair value of investment properties came to a total of EUR 4,953.3 million (4,970.9). The change in the value of investment properties, including investments and divestments during the reporting period, was EUR 24.0 million (15.0).

The value of properties funded with ARAVA loans or interest-subsidised loans would be EUR 245 million higher when valuated with the income value method.

At the end of September, the commuting zone of the Helsinki Metropolitan Area accounted for around 86.5% and Tampere and Turku together made up around 13.5% of the value of apartments.

Investments, divestments and property development

Investments in apartments totalled EUR 8.9 million (29.8). The Helsinki Metropolitan Area represented 90.6% of all investments during the period under review. New apartments accounted for 42.1% of the total. At 30 September 2024, there were binding purchase agreements to a total of EUR 4.2 million (33.5).

During the period under review, 0 rental homes were divested in Finland (3). Their total value was EUR 0.0 million (0.5).

The book value of the plot reserve owned at the end of September totalled EUR 67.2 million (48.1). The value of new plots acquired by the end of September totalled EUR 8.1 million (0.0).

Permitted building volume for around 1,550 homes is being developed for plots in the company's housing portfolio. This allows SATO to utilise existing infrastructure, create a denser urban structure and thus bring more customers closer to services and public transport connections.

A total of 68 rental homes (161) were completed for SATO. A total of 189 rental homes (518) were under construction at 30 September 2024.

A total of EUR 4.2 million (6.2) was spent on repairing apartments and improving their quality.

Personnel

At the end of September, the Group had 304 employees (331), of which 277 (301) had a permanent employment contract. The average number of personnel in July-September was 314 (343).

Events after the review period

SATO retained its three stars in the Global Real Estate Sustainability Benchmark (GRESB) assessment providing an internationally comparable score. SATO's results were published on 15 October 2024.

Short-term risks and uncertainties

Risk management is used to ensure that risks impacting the company's business are identified, managed and monitored. The main risks of SATO's business are risks related to the business environment and financial risks.

SATO's most significant risks relate to inflation and the resulting high interest rate level. The war in Ukraine resulted in a surge in the prices of energy, food, materials and commodities and an elevated interest rate level. Higher living costs may have a negative effect on the purchasing power of consumers as well as on their capacity to perform their obligations. If the strong growth in the cost of financing and maintenance costs continues and the market situation does not provide an opportunity to transfer the higher costs into rents in full, this may have a negative impact on the fair value of investment assets and the company's ability to perform its obligations or to finance its investments. This means new investments and renovations may have to be postponed.

Geopolitical risks have recently increased further and may have significant negative impacts on the company's operating environment.

The highest risks in apartment rental are to do with cyclical movements and changes in supply and demand. The market risk may push the supply of rental homes higher than their demand. This would result in idle rental housing stock and pressure for rents to level off or fall, especially as regards old housing stock.

A decline in the housing market may have a negative effect on the market value of SATO's housing stock. In line with its strategy, SATO has been focusing in its investments on growth centres and on renovating and repairing existing housing stock and, consequently, ensuring the rentability and value development of the apartments.

Changes in regulation by the authorities and in legislation and related uncertainty may have a significant impact on the reliability of the investment environment and, consequently, on SATO's business. SATO monitors and anticipates these changes and also calls attention to what it considers to be negative impacts of regulation.

The management of financial risks is steered by the Group's treasury policy. Our risk management principles have been defined in the treasury policy adopted by SATO's Board of Directors. Our most significant financial risks relate to liquidity, refinancing and interest rates. We manage our liquidity and refinancing risks by diversifying the financing sources and maturity of our loan portfolio, and by holding sufficient liquidity reserves in the form of committed credit facilities and other long-term financing commitments. The company has in place a EUR 2.0 billion Euro Medium Term Notes (EMTN) Programme, under which SATO has issued bonds in the total amount of EUR 600 million.

The means for managing liquidity risk at SATO include cash assets, a bank account limit, EUR 600 million in committed credit facilities and a EUR 400 million commercial paper programme. We increase the amount of reserves as the funding requirements grow. Our objective is to keep the liquidity requirements of the next 12 months covered by committed agreements.

Floating-rate loans represent an interest rate risk which we manage by balancing the share of fixed- and floating-rate loans either by fixed-rate debt arrangements or interest rate derivatives. In accordance with our treasury policy, our aim is for fixed-rate loans, including interest rate derivatives, to account for more than 60% of our debt portfolio. At the end of the review period, the fixed rate portion of the loan portfolio after hedging was 60.5% (63.0) excluding short-term loans.

For a broader description of risks and risk management, see the Group's website and Annual Report for 2023 at www.sato.fi/en.

Outlook

In the operating environment, SATO's business activities are mainly affected by consumer confidence, development of purchasing power, rent and price development for apartments, competitive situation and interest rate level. Weak economic growth and the declining employment rate have kept consumer confidence at a low level. Going forward, the lower interest rate level, declining inflation and pay rises will improve consumers' purchasing power and the employment rate, and the Finnish economy is expected to turn to moderate economic growth in 2025.

Construction of newbuild homes is at a historically low level. Largely due to an increase in the volume of interest-subsidised housing construction, there has, however, been a slight upturn in projects started. The number of apartments completed has contracted clearly this year, but the newbuild construction volume of previous years, which exceeds the long-term housing demand, is, however, maintaining an oversupply of rental homes in the growth centres. In Helsinki, the number of vacant rental homes is decreasing slightly, but the shrinking of the oversupply has been slower than anticipated and competition for good tenants continues.

Dense urban housing is still becoming increasingly popular, and there is demand for rental apartments in growth centres close to good public transport connections and services. The demographic change coupled with the price development create a stable foundation for rental housing demand, especially in the HMA, Tampere and Turku. Migration to large growth centres has continued, and the HMA's migration gain in 2023 was the highest in the 2000s: 23,500 persons. In early 2024, the trend levelled off and the migration gain of the HMA was 10,300 persons. The strong migration trend is reflected in the demand for rental homes in growth centres.

Urbanisation, the income development of wage and salary earners, pent-up housing demand of households and lower interest rates together with the decrease in new housing production will increase housing demand going forward. The housing allowance policy changes may, however, steer consumers towards looking for more affordable housing. Some of those looking for a home to buy may be considering a rental home as a housing option.

Rental housing providers are still competing for good tenants, which results in rent reviews remaining moderate. Going forward, higher maintenance and finance costs will be reflected in higher rent costs, while at the same time the supply of rental housing decreases.

In line with the decision made in October 2022, SATO will still refrain from launching any newbuild construction projects.

In line with its majority shareholder's operating model, SATO Corporation will not publish guidance on its 2024 earnings. The parent company of Balder Finska Otas AB is Fastighets AB Balder, which is quoted on the Stockholm Stock Exchange.

SATO Corporation's shareholders at 30 September 2024

Largest shareholders and their holdings

Balder Finska Otas AB (Fastighets AB Balder)48,483,56457.0%Stichting Depositary APG Strategic Real Estate Pool19,217,47022.6%Elo Mutual Pension Insurance Company10,849,62112.8%State Pension Fund of Finland4,194,3004.9%Valkila Erkka385,0000.5%Tradeka Invest Ltd189,7500.2%Research Foundation of the Pulmonary Diseases180,0000.2%SATO Corporation166,0000.2%Komulainen Pekka159,8250.2%Entelä Tuula151,5000.2%Others (119 shareholders)1,085,4141.3% At 30 September 2024, SATO had 85,062,444 shares and 129 shareholders registered in the book-entry system. The share turnover rate was 0.0% for the period from 1 January to 30 September 2024.

For more information, please contact:

Antti Aarnio, President and CEO, phone: +358 201 34 4200

Markku Honkasalo, CFO, phone: +358 201 34 4226

www.sato.fi/en  

ENCLOSURES

Interim Report 1 January to 30 September 2024

Interim Report presentation 1 January to 30 September 2024

DISTRIBUTION

Euronext Dublin, main media, www.sato.fi/en 

SATO Corporation is an expert in sustainable rental housing and one of Finland's largest rental housing providers. SATO owns around 26,000 rental homes in the Helsinki Metropolitan Area, Tampere and Turku.

SATO aims to provide an excellent customer experience and a comprehensive range of urban rental housing alternatives with good access to public transport and services. We promote sustainable development and work in open interaction with our stakeholders.

SATO invests profitably, sustainably and with a long-term view. We increase the value of our assets through investments, divestments and repairs.

Attachments

Interim report 1 January - 30 September 2024

Interim report presentation 1 January - 30 September 2024